IMF Issues Grim Warning

Highlighting the growing concern within international circles and among the various ratings agencies, the International Monetary Fund released its newest World Economic Outlook today, and the verdict is unpleasant. Aside from lowering our economic growth projections since its last iteration (2.5 percent in 2011 as opposed to April's 2.8 percent), the IMF says that the United States so far failing to address its fiscal situation and policymakers 'playing with fire' on the debt limit are posing risks to global economic recovery.

The IMF states clearly that the U.S., in order to prevent unbalanced global economic growth, should:

"[I]mplement credible and well-paced consolidation programs focused on bolstering medium-term debt sustainability. Given the tepid recoveries in these economies thus far, consolidation should ideally be gradual and sustained, so as not to undermine growth prospects. For the United States, it is critical to immediately address the debt ceiling and launch a deficit reduction plan that includes entitlement reform and revenue-raising tax reform."

Furthermore, the IMF says that if the U.S. delays in implementing fiscal adjustments, global economic growth -- including growth in the U.S. -- would be negatively effected. In a rather grim comparison, Jose Vinals, director of the IMF's monetary and capital markets department said, "If you make a list of the countries in the world that have the biggest homework in restoring their public finances to a reasonable situation in terms of debt levels, you find four countries: Greece, Ireland, Japan and the United States." 

Following recent gloomy outlooks on the U.S. credit rating from ratings agencies Moody's, S&P, and Fitch, this warning from the IMF is just one more shot across the bow. Policymakers in the U.S. must increase the statutory debt limit in order to avoid a default on our nation's obligations, and must put in place a significant long-term debt reduction plan that phases in savings as to protect a fragile economic recovery while setting the nation on a sound fiscal path in order to ease market fears and show we can and will get our finances in order.